5 Best Stocks From The Leading Odd Tech-Utility Duo In August
Zacks Investment Research | Aug 29, 2017 09:56PM ET
An odd couple has been leading the U.S. stock market in August – technology and utilities. But, why are they odd? While technology stocks always promise outsized gains, utilities are better known for low but steady returns.
Being non-cyclical, technology remained unperturbed to market gyrations in the month. Less vulnerability to tax cuts and fluctuations in interest rates also helped them gain traction. Utilities, on the other hand, are mostly known for offering hefty yields. This time around, they are giving better yields than their bond counterparts.
With North Korea lobbing missiles over Japan, hurricane Harvey wreaking chaos and political climate in the United States losing stability, possibilities of a market correction haunted investors. This also compelled them to bet on areas perceived as less risky, like utilities. Given such promising trends, investing in sound stocks from these two sectors seems prudent for now.
What’s Driving Tech Stocks?
Tech stocks are not cyclical and offer growth irrespective of economic conditions. This has helped the sector lead the market this month, while Apple Inc. (NASDAQ:AAPL) touched a record high on Aug 29 as optimism builds over iPhone 8. Apple’s shares ended 0.9% higher at $162.91 a share after research firm IDC said that it expects iPhone shipments to rise 9.1% next year once the new iPhone 8, 7S and 7S Plus models are released. This will be the highest growth in iPhone shipment since 2015. Apple’s shares have, in fact, outperformed at least two-thirds of businesses in the S&P 500 over the last three years. Apple’s CEO Tim Cook recently received $89 million stock payout after the iPhone maker hit key performance target.
Investors are also pouring money into Internet and tech companies since they are less susceptible to tax cuts and changes in interest rates. Tech companies already pay lower taxes compared to other companies due to a bigger share of overseas revenues. The effective tax rate of around 27% for tech companies trails only healthcare and real estate firms in the S&P 500 cohort. Tech firms were also hardly affected by changes in 10-year Treasury yields over the past three years as they haven’t whipsawed over speculation about the Fed’s pace of tightening.
Many tech companies have, in fact, boosted earnings without the help of government policies. Notably, Microsoft Corporation (NASDAQ:MSFT) is riding high on growing demand for smartphones and web-based services. Total earnings in the second quarter for the tech companies in the S&P 500 cohort are up 17.6% from the same period last year on 9.1% higher revenues, with 81.4% beating EPS estimates and 86.4% surpassing revenue estimates (read more: Zacks Investment Research
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